Pilot Paper F6(MYS) Taxation Malaysia

The following rates and allowances are to be used in answering this paper Income tax rates
(Rates applicable to all chargeable income liable to tax and not specifically chargeable at a different rate)
Resident individuals
Chargeable income Band Cumulative RM RM 2,500 2,500 2,500 5,000 15,000 20,000 15,000 35,000 15,000 50,000 20,000 70,000 30,000 100,000 150,000 250,000 Excess Tax payable Rate Cumulative % RM 0 0 1 25 3 475 7 1,525 13 3,475 19 7,275 24 14,475 27 54,975 28

Resident companies
Having a paid up ordinary share capital not exceeding RM2.5 million
The first RM500,000 The remainder Other resident companies All 20% 28%

28%

Selected personal deductions

Single individual - basic rate - disabled rate Wife/husband - basic rate - disabled rate Child - basic rate - enhanced rate - disabled rate Life insurance and approved schemes Parents' medical expenses Own medical costs Necessary basic supporting equipment Educational and medical insurance RM 8,000 14,000 3,000 6,500 1,000 4,000 5,000 6,000 5,000 5,000 5,000 3,000

Rebates
Single individual - chargeable income up to RM35,000 Individual entitled to a deduction for a spouse or a former wife chargeable income up to RM35,000 RM 350 700

Prescribed value of a motor car and its related benefits

Cost of motor car (new) RM Up to 50,000 50,001 75,001 100,001 150,001 200,001 250,001 350,001 500,001 and above Annual prescribed benefit of motor car RM 1,200 2,400 3,600 5,000 7,000 9,000 15,000 21,250 25,000 Annual precribed benefit of petrol RM 600 900 1,200 1,500 1,800 2,100 2,400 2,700 3,000

75,000 100,000 150,000 200,000 250,000 350,000 500,000

The annual value of the motor car benefit can be reduced to half of the prescribed value if the car provided is more than five years old, but the value of petrol remains unchanged.

Prescribed value of household furnishings, apparatus and appliances

Type of benefit Semi-furnished with furniture in the lounge, dining room or bedroom Plus one or more of the following: air-conditioners, curtains and carpets Plus one or more of the following: kitchen equipment, crockery, utensils and appliances ie fully furnished Annual value RM 840

1,680

3,360

Prescribed value of other benefits

Type of benefit Telephone fixed or mobile hardware bills Annual value RM 600 600 3,600 4,800 7,200

Gardener Domestic servant Driver

Capital allowances
Initial % 10 20 20 20 20 Annual % 3 14 20 40 10

Industrial buildings Plant and machinery - general Motor vehicles and heavy machinery Computers, information technology equipment and computer software Office equipment, furniture and fittings

Real property gains tax

A Companies Disposals within the following period after the date of acquisition: in the first two years in the third year in the fourth year in the fifth year in the sixth year and thereafter Tax rate % B Others except C C 'Non-citizens'

30 20 15 5 5

30 20 15 5 0

30 30 30 30 5

'Non-citizens' in the above table means individuals who are not citizens and not permanent residents.

Sales tax Service tax

10% 5%

All FIVE questions are compulsory and MUST be attempted 1 (a) Encik Chin has the following income for the year ended 31 December 2006: RM 36,600 RM 3,000 57,000 6,840 9,000* 6,300

(1) Sole proprietorship business: Net profit per accounts After including the following: Lottery winnings After deducting the following: Salary to Encik Chin Employees Provident Fund(Encik Chins personal contribution) Van running expenses Depreciation

* The Inland Revenue Board has agreed the three-quarters of the van running expenses were incurred for business purposes. The capital allowance in respect of the van for the year of assessment 2006 amounts to RM6,800. (2) Partnership business: Divisible income (partnership) Capital allowances (partnership) Interest on capital (Encik Chin only) RM 90,000 300 2,900

The partnership is an accounting firm comprising two partners. Encik Chins share of profits and losses is 40%. (3) Rental income from a furnished house: Statement of receipts and outgoings: Receipts rents January to July at RM1,500 per month August to September vacant October to December at RM1,600 per month Outgoings: Quit rent and assessment Cost of replacing the lounge furniture Fire insurance Net RM 10,500 4,800 15,300 RM 300 3,100 570 (3,970) 11,330

(4) A gross dividend amounting to RM1,000 was received in October 2006. Encik Chin has made the following claims for the year of assessment 2006: - Tax relief for his wife who was living together with him until their divorce on 1 April 2006. - Personal contribution to the Employees Provident Fund. Required: (i) (ii) Compute the tax payable by Encik Chin for the year of assessment 2006. Explain your treatment of the following items in the soleproprietorship business: Lottery winnings Salary to Encik Chin (2 marks) (19 marks)

(iii) Explain the tax treatment of the claim for wife relief made by Encik Chin. (1 mark) Compute the tax payable by Encik Chin for the year of assessment 2006.

(b)

Lee & Chin, a taxable person licensed under the Service Tax Act, rendered audit and accounting service to Ben Sdn Bhd amounting to RM30,000. Lee & Chin also incurred disbursements on behalf of Ben Sdn Bhd consisting of:

Legal advice amounting to RM6,300 by Ravi & Co, including service tax. - Fees for despatch of documents by a courier company, which is not licensed under the Service Tax Act, at a cost of RM100. Required:

(i) Prepare an invoice for Lee & Chin to issue to Ben Sdn Bhd incorporating all of the above items.

(4 marks)

(ii) Explain the imposition of service tax in relation to the above invoice. (4 marks) (30 marks) 2 (a) Laju Sdn Bhd, a manufacturer of car accessories, presents its profit and loss account for the year ended 30 November 2006 as follows: Note Sales Cost of sales Gross profit Less: Salaries and wages Freight and insurance Bad and doubtful debts Consultancy fees Motor vehicles expenses Donations Staff welfare Hire purchase interest Lease rentals Add Interest income : Profit before taxation Notes: (1) RM000s RM000s 22,410 8.503 13,907

1 2 3 4 5 6 7 8 9 10

2,770 2,067 381 144 186 149 50 5 63 5,815 8,092 14 8,106

Salaries and wages include a sum of RM18,000 paid to an individual to persuade him to join the company as a technical consultant employed under a contract for a period of five years.

(i) (ii)

(2) Freight and insurance includes: Export credit insurance premiums of RM554,000 paid to the Malaysia Export Credit Insurance Berhad (MECIB). Insurance premiums of RM21,000 for whole life insurance policies on the lives of key personnel. The company is the beneficiary of these policies. (3) Bad and doubtful debts comprise: Bad debts written off during the year Net increase in specific provision Net increase in general provision Bad debts recovered during the year Profit and loss account RM000s 183 33 193 (28) 381

All of the debts are trade debts, except for the sum of RM23,000 included in bad debts written off which is in respect of a loan to an exemployee.

Note: do not know what the position is in Malaysia re general provisions/their rate of progress re adoption of IFRS so will leave this one up to you. (4) The consultancy fees were all paid to a local consultant engaged to implement and oversee the usage of information technology for the purpose of improving the management and production processes of the company. Motor vehicles expenses include depreciation of RM32,000. The donations were made to an approved institution on 20 December 2005. The staff welfare expense is in respect of the construction cost of a child care centre. The hire purchase interest is in respect of a new motor car costing RM132,000. The car was purchased on 2 January 2006 whereupon a deposit of RM60,000 was paid. The monthly instalments of RM3,500, which include interest of RM500, commenced on 2 February 2006. The lease rentals which relate to a motor car commenced on 5 December 2005 at RM5,250 per month for a period of 24 months. The cost of the vehicle was RM156,000.

(5) (6) (7) (8)

(9)

(10) Interest income comprises: RM10,000 on fixed deposits which matured on 15 December 2005; and RM4,000 on fixed deposits which matured on 10 June 2006. Required: (i) Starting with the net profit before taxation compute the chargeable income of Laju Sdn Bhd for the year of assessment 2006. Assume that there is no previous qualifying plant expenditure. N.B. Your computation must follow the descriptions used in the profit and loss account, indicating nil for every item that does not require adjustment. (16 marks) (ii) (b) Explain your treatment of the items in notes 1, 2 and 3. (5 marks)

Explain briefly each of the following facilities which are available to licensed manufacturers to acquire raw materials free from sales tax for use in the manufacturing of taxable goods: the ring system; and the refund system. (4 marks) (25 marks)

(a)

Encik Zaidi, who is employed as a senior executive, has the following income and benefits for the year ended 31 December 2006:

Salary Entertainment allowance

RM 222,000 45,000

The company provided him with: A domestic servant employed by the company at a salary of RM600 per month. An interest free loan for which the company had to take out a loan from a third party and incurred interest amounting to RM8,000. Leave passage for a family holiday within Malaysia at a cost of RM900 per person for Encik Zaidi, his wife and his father May 2006. The use of a car costing RM125,000 together with fuel. Encik Zaidi made the following claims: - Entertainment expenses incurred by him to entertain the companys clients amounting to RM46,500. - Contributiions to the Employees Provident Fund amounting RM29,370. - Relief for his wife, Puan Siti. Puan Siti has elected for joint assessment. Her income for the year ended 31 December 2006 is as follows: Income from giving tuition amounting to RM1,600. Dividend (gross) amounting to RM200. Required: Compute the tax payable in respect of the joint assessment of Encik Zaidi and his wife for the year of assessment 2006. (12 marks) (b) (c) Explain the circumstances under which a wife may elect for joint assessment. (2 marks) Yuyu Sdn Bhd which makes up its accounts to 30 April each year has the following payment record: Instalment payments of RM130,000 per month for the year of assessment 2005 Instalment payments of RM160,000 per month for the year of assessment 2006 Payment of final tax of RM540,000 for the year of assessment 2005 All the above payments were made on time. The company paid a dividend of RM2.5 million (gross) to its shareholders on 15 January 2006. The balance of the companys s.108 account as at 30 April 2005 was RM355,000. Required:

Prepare the s.108 account of Yuyu Sdn Bhd for the year of assessment 2006. (6 marks) (20 marks) 4 On 1 June 2003 Mr Yong transferred his house to Miss Grace for RM400,000. The transfer followed an agreement made verbally on 2 January 2003. The consideration was paid in full on 15 April 2003. The house had been purchased by Mr Yong on 11 May 2000 for RM288,000. Prior to the disposal of the house Mr Yong incurred the following expenditure: Stamp duty on purchase Interest on a mortgage loan incurred from 1 January to 31 December 2001 RM 4,700 13,000

Miss Grace subsequently sold the house for RM478,000 and incurred agents fees of RM7,000 in connection with the disposal. Prior to the disposal of the house Miss Grace spent RM28,000 on an extension to the property. The Sale and Purchase Agreement (S&P) for this disposal was signed on 23 September 2006. Mr Yong is a citizen of Malaysia but Miss Grace is neither a citizen nor a permanent resident. Required: (a) (i) (ii) (b) State, with reason(s), the date of the disposal of the house by Mr Yong. (3 marks) State, with reason(s) the date of the acquisition of the house by Miss Grace. (1 mark)

Compute the real property gains tax payable by Mr Yong and Miss Grace respectively. (11 marks) (15 marks)

(a)

Link Sdn Bhd signed an agreement with Jones Ltd a Japanese company, for the construction of a building in Penang. Jones set up a project management office in Penang. The total value of the contract is RM7 million of which RM3 million is the service portion, and the balance of RM4 million the cost of materials. Required: (i) (ii) Calculate the amount of withholding tax which Link Sdn Bhd must deduct from the payments made to Jones Ltd? (3marks) Explain the tax position of Jones Ltd and the tax compliance required of the company.

(iii) State the two features that distinguish the withholding tax applicable to a non-resident contractor under s.107A from other withholding taxes. (2 marks) (b) State, with brief explanations, the factors that determine the resident status of a company under the Income Tax Act. (2 marks) (10 marks)

End of Question Paper

Pilot Paper F6 (MYS)

Taxation (Malaysia)
1 (a) Encik Chin

Answers

(i) Year of assessment 2006 (basis period 1 January to 31 December 2006) Sole-proprietorship business Net profit per account Less: Lottery winning RM 36,600 (3,000) 33,600 RM

Add back: Salary to Encik Chin (proprietor) Employees Provident Fund contributions (proprietor) Van running expenses (1/4 x RM9,000) Depreciation Adjusted income Less: Capital allowance (75% x 6,800) Statutory income Partnership business Divisible income 40% x RM90,000 Interest on capital Adjusted income Less: Capital allowance 40% x RM300 Statutory income Rental income Gross rents (RM10,500 + RM4,800) Less: Quit rent & assessment Cost of replacing lounge furniture Fire insurance Adjusted/statutory income Dividend - statutory income Aggregate/total income Less: personal relief Self Wife Employees Provident Fund Chargeable income Tax on RM100,000 Tax on RM35,000 at 27% S.110 set off (1,000 @28%) Tax payable RM 14,475 9,450 23,925 (280) 23,645

57,000 6,840 2,250 6,300 105,990* (5,100) 100,890*

RM 36,000 2,900 38,900* (120) 38,780*

15,300 RM 300 3,100 570 (3,970) 11,330* 1,000 152,000 RM 8,000 3,000 6,000 (17,000) 135,000

* Marks are awarded for adjusted income and statutory income in respect of each source for the correct description and not for the figure. (ii) Lottery winnings are excluded from the tax computation because they are not income of his business. Salary to the proprietor constitutes drawings from the business, thus not deductible.

(iii) A resident individual who has a wife living together with him in the basis year is allowed wife relief amounting to RM3,000. Mr. Chin is therefore allowed wife relief as his wife was living together with him in the basis year 2006 up to the time of their divorce. [s.47(1), Income Tax Act] (b) (i) Invoice issued by Lee & Chin to Ben Sdn Bhd
Audit and accounting fees Courier charges Service tax at 5% Disbursement: Legal fee Total RM 30,000 100 30,100 1,505 31,605 6,300 37,905

(ii) The courier charges are included in the imposition of the service tax along with the audit and accounting fees because both are taxable services. Since the courier is not licensed under the Service Tax Act the imposition of tax has to be made by Lee & Chin. The legal fee billed to Lee & Chin is inclusive of the service tax because Ravi & Co. is licensed to collect service tax. As service tax is a single stage tax the legal fee is included in the invoice as a disbursement item. 2 (a) (i) Laju Sdn Bhd Year of assessment 2006 (Basis period 1 December 2005 to 30 November 2006)
Note Net profit before tax Interest income Payment to individual Export credit insurance premiums Life insurance premiums Bad debts written off Net increase in specific provision Net increase in general provision Bad debts recovered Consultancy fees for IT Depreciation Donations to approved institutions Construction of child care centre Hire purchase interest Lease rentals RM000's + 8,106 18 554 21 23 Nil 193 Nil Nil 32 149 50 Nil 13 8,605 (568) 8,037 (41) 7,996 14 8,010 (149) 7,861 RM000's 14 1 2 2 3 3 3 3 4 5

568

Adjusted income Less: Capital allowances (RM5,000 + 36,000) Statutory income from business Add: interest income (RM10,000+ 4,000) Aggregate income Less: Donations to approved institutions Total/chargeable income

Workings: Lease rentals RM5,250 x 12 months = RM63,000 restricted to RM50,000.

Construction of child care centre No initial allowance Annual allowance 10% x RM50,000 = RM5,000 Motor car (hire purchase)
Qualifying plant expenditure RM60,000 + (3,500 - 500 = 3,000 x 10 months) YA 2006 IA 20% 18,000 AA 20% 18,000 Residual expenditure as at 30 November 2006 RM 90,000

36,000 54,000

(ii) Notes: (1) Payments to the individual which encouragers him to commence a five year employment contract with the company can be considered to be capital expenditure because it procures an asset of an enduring nature. (2) Export credit insurance premiums qualify for a double deduction as they are paid to the Malaysia Export Credit Insurance Berhad (MECIB) [Income tax (Deductions of Premiums for Export Credit Insurance) Rules 1985] Life insurance premiums are not deductible because they constitute capital expenditure in that the company has acquired an asset with those premiums. (3) Bad and doubtful debts Only trade debts written off/recovered are deductible/taxable, hence the loan written off is added back. For a provision to qualify for deduction it must be specific and in respect of trade debts, therefore the general provision is added back. (b) The ring system A licensed manufacturer may apply to use the ring system to acquire raw materials free from sales tax by submitting a prescribed form (ST No. 5) to the sales office where he is licensed. The licensed manufacturer must keep an account of the use of the raw materials purchased without payment of sales tax in a manner acceptable to the Customs Department. The refund system The refund system is available to a licensed manufacturer who makes sales to the holder of a form ST No. 5 or 5A. The licensed manufacturer may apply to use the refund system by submitting a prescribed form (JKED No. 2). Separate application is required for each transaction for which a refund is claimed. The claim for refund must be made within one year after the sale.

(a)

Joint assessment of Encik Zaidi and his wife for the year of assessment 2006
RM S.13(1)(a) Salary Entertainment allowance Interest free loan (see note) S.13(1)(b) Domestic servant Leave passage (father) Car Fuel RM RM 222,000 45,000 8,000 275,000 4,800 900 5,000 1,500 12,200 287,200 (45,000) 242,200 1,800 244,000 8,000 3,000 6,000 (17,000) 227,000 14,475 34,290 48,765 56 48,709

Less: entertainment expenses limited to Total income Total income of wife (RM1,600 + 200) Aggregate of total income of husband and wife Less: Personal reliefs: Self Wife Employees Provident Fund Chargeable income Tax on RM100,000 Tax on RM127,000 x 27% Less: s.110 set-off (RM200 x 28%) Tax payable

Note: An interest free loan is treated as a perquisite assessable under s.13(1)(a), Income Tax Act, based on the cost borne by the employer. [Public Ruling No. 1/2006] (b) A wife may elect for her income to be assessed in the name of her husband: where the individual and his wife were living together in the basis year for a year of assessment and did not in that basis year cease to live together or to be husband and wife of each other; however, where the wife is not resident for the basis year for a year of assessment she may only elect if she is a citizen. S.108 account of Yuyu Sdn Bhd for the year of assessment 2006
Balance as at 1 May 2005 Add: Final monthly instalment payment for YA 2005 (paid in May 2005) Final tax paid for YA 2005 Monthly instalment payments for YA 2006 (160,000 x 11 months) Compared aggregate Compared total* RM2,500,000 x 28% (tax deducted from dividends distributed on 15 January 2006) Balance as at 30 April 2006 carried forward to YA 2007 RM 355,000 130,000 540,000 1,760,000 2,785,000*

(c)

700,000 2,085,000

* Marks are awarded for correct description of compared aggregate and compared total and not for the figure.

(a)

(i) In the absence of a written agreement, the date of disposal is the earlier of the date of transfer of the property (1 June 2003) or the receipt of the full consideration by the disposer (15 April 2003). Therefore, 15 April 2003 is deemed to be the date of disposal. (ii) The date of acquisition of the house by Miss Grace (the acquirer) is deemed to coincide with the date of disposal of the house by the disposer (Mr Yong) ie 15 April 2003. [Paragraph 15(2), Schedule 2, Real Property Gains Tax Act.]

(b)

Mr Yong Year of assessment 2003

Disposal price Acquisition price Consideration paid Add: Stam duty p Chargeable gain Less: Schedule 4 ex ption: em Higher of RM5,000 or 10% of chargeable gain RM 400,000 288,000 4,700 292,700 107,300 10,730

Miss Grace Year of assessment 2006

RM Disposal price Consideration received Less: Permitted expenses: Cost of extension Less: Incidental costs of disposal: Agents fees Acquisition price Chargeable income Less: Schedule 4 exemption: Higher of RM5,000 or 10% of chargeable gain 478,000 28,000 450,000 7,000 443,000 400,000 43,000 5,000 38,000 RM11,400

Tax at 30% (disposed in the fourth year) (non-citizen and non-permanent resident) Note: Mortgage loan interest is not a deductible expense.

(a)

(i)

The amount of withholding tax is calculated as follows:

Service portion 10% x 3,000,000 = 3% x 3,000,000 = Withholding tax = RM 300,000 90,000 390,000 RM 3,000,000

(ii)

Jones Ltd is liable to tax because it is carrying on business in Malaysia and has a management office in Malaysia. The company is required to submit a return of income and the tax payable. The company is allowed to set off the 10% tax withheld at source against its income tax liability and pay the difference or claim a refund, as the case may be.

(iii)

The two distinguishing features are: - Unlike other withholding taxes, the tax in respect of a non-resident contractor under s.107A is not a final tax.

Part of the tax withheld (3%) from the non-resident contractor is in respect of employees tax liabilities. (b) A company, carrying on a business or businesses, is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its businesses, or any one of its businesses, are exercised in Malaysia. Any other company is resident in Malaysia for the basis year for a year of assessment, if at any time during that basis year the management and control of its affairs are exercised in Malaysia by its directors or other controlling authority.

Pilot Paper F6 (MYS) Taxation (Malaysia) 1 (a) (i) Sole-proprietorship business Net profit per account Lottery winning Salary to Encik Chin Employees Provident Fund Van running expenses Depreciation Adjusted income - for correct description Capital allowance Statutory income - for correct description Partnership business Divisible income Interest on capital Adjusted income - for correct description Capital allowance Statutory income - for correct description Rental income Gross rents Quit rent and assessment Cost of replacing lounge furniture Fire insurance Adjusted/statutory income - for correct description Dividend Personal reliefs: self wife Employees Provident Fund s.110

Marking Scheme Marks 0.5 1 1 1 1 0.5 0.5 1 0.5 1 1 0.5 1 0.5 1 1 1 1 0.5 1 0.5 0.5 0.5 1 19 1 1 2 1 1 1 1 1 1 4 1 1 1 1 4 30

(ii) Lottery winnings Salary to proprietor

(iii) Wife relief

(b) (i)

Audit and accounting fees Courier charges Service tax Disbursement: legal fee

(ii) Taxable services Courier company not licensed Ravi & Co. - licensed Legal fee - a disbursement item

(a) (i)

Interest income Payment to individual Export credit insurance premiums Life insurance premiums Bad debts written off Net increase in specific provision Net increase in general provision Bad debts recovered Consultancy fees on IT Depreciation Donations to approved institutions Construction of child care centre Hire purchase interest Lease rentals Capital allowances Interest income Donations

Marks 0.5 1 1 1 0.5 0.5 0.5 0.5 1 0.5 1 1 0.5 1 3.5 1 1 16 1 1 1 2 5 2 2 4 25 0.5 0.5 1 1 1 1 1 1 2 0.5 1 0.5 1 12 1 1 2

(ii) Payment to individual Export credit insurance Life insurance Bad and doubtful debts

(b) Ring system Refund system

(a) Salary Entertainment allowance Interest free loan Domestic servant Leave passage Car Fuel Entertainment expnses Total income of wife Personal reliefs: self wife Employees Provident Fund s.110

(b) Individual and wife living together Wife not resident

(c) Balance as at 1 May 2005 Final instalment - YA 2005 Final tax - YA 2005 Instalments - YA 2006 Compared aggregate - for correct description Compared total - for correct description Tax deducted from dividends

Marks 1 1 1 1 0.5 0.5 1 6 20 0.5 0.5 0.5 0.5 1 3 1 1

(a) (i)

Absence of agreement Earlier of the two dates Date of transfer Full consideration received Date of disposal

(ii) Date of acquisition

(b) Mr Yong Disposal price Consideration paid Stamp duty Schedule 4 exemption Correct tax rate Interest on mortgage loan not deducted Miss Grace Consideration received Cost of extension Agents fees Acquisition price Schedule 4 exemption Correct tax rate

0.5 1 1 1 1 1

0.5 1 1 1 1 1 11 15 1 1 1 3 1 1 1 3 1 1 2 1 1 2 10

(a) (i)

Service portion only 10% 3%

(ii) Jones Ltd: Liable to tax Submit return Set off tax withheld

(iii) Not a final tax Employees' tax liabilities

(b) Management and control of businesses Management and control of affairs